How Day Trading Works


Risk and Reward
A big risk could mean big reward -- or it could be your loss.
A big risk could mean big reward -- or it could be your loss.
©iStockphoto/EricHood

Although the stock market collapse of 2000 ended the careers of many day traders, the profession is still alive and well. According to the Occupational Outlook Handbook, which is produced by the U.S. Department of Labor, there were 320,000 securities, commodities and financial services agents in 2006. This number includes day traders, but it also includes stockbrokers, floor brokers, investment bankers and financial service advisors. We can't tell for certain how many day traders are included in the grand total, but we can make some assumptions for the sake of an example. If we assume for a moment that full-time day traders only represent five to 10 percent of this population, that amounts to 16,000 to 32,000 individuals who call themselves day traders. Amateurs and part-timers may number in the millions.

A few of these individuals actually make a lot of money. But can you? Before you decide, let's review some important facts about day trading covered in this article:

  • Day traders typically suffer severe financial losses in the first few months of trading.
  • Day trading is extremely stressful.
  • Day trading is expensive.
  • Day traders must be savvy enough to differentiate legitimate information from "hot tips" and "expert advice."

If you're not intimidated by these warnings, then day trading might be right you. If you are wary, it might be best to stick with more traditional investing strategies, which offer more balanced risks and rewards.

For more information about trading and the stock market, follow the links below.

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Sources

  • Anderson, Jenny. "Craving the High That Risky Trading Can Bring."New York Times. 7 February 2008.http://www.nytimes.com/2008/02/07/business/worldbusiness/07trader.html?adxnnl=1&ref=science&adxnnlx=1202392840-KNqXddkWTjm6GLdtT3ylmQ
  • Blankenhorn, Dana. "Night of the living day traders."Salon. 30 January 1999. http://dir.salon.com/story/tech/feature/1999/01/30/feature/
  • Cave, Damien. "Living in, and loving, a bear market."Salon. 8 December 2000. http://dir.salon.com/story/tech/feature/2000/12/08/day_traders/
  • Companion Web Site to "Trillion Dollar Bet," NOVA Online. http://www.pbs.org/wgbh/nova/stockmarket/
  • Day Trading Facts for Consumers, Federal Trade Commission http://www.ftc.gov/bcp/edu/pubs/consumer/invest/inv01.shtm
  • Day Trading on the SEC Web Site http://www.sec.gov/investor/pubs/daytips.htm
  • Gimein, Mark. "Day trader madness."Salon. 30 July 1999.http://dir.salon.com/story/tech/log/1999/07/30/day_traders/
  • Koch, Edward T., Debra DeSalvo and Joshua A. Kennon. The Complete Idiot's Guide to Investing, Third Edition. Alpha Books, New York, 2005.
  • Logue, Ann C. Day Trading for Dummies. John Wiley & Sons, Indianapolis, Indiana, 2008.
  • Occupational Outlook Handbook, U.S. Department of Labor, Bureau of Labor Statistics, Securities, Commodities, and Financial Services Sales Agentshttp://www.bls.gov/oco/ocos122.htm
  • Special Study: Electronic Communication Networks and After-Hours Trading, U.S. Securities and Exchange Commission http://www.sec.gov/news/studies/ecnafter.htm
  • Testimony of Arthur Levitt, Chairman of the U.S. Securities and Exchange Commission Before the Senate Permanent Subcommittee on Investigations Committee on Governmental Affairs, Concerning Day Trading, 16 September, U.S. Securities and Exchange Commissionhttp://www.sec.gov/news/testimony/testarchive/1999/tsty2199.htm

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